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To address short-term asset-liability mismatches during weekends, lenders, led by State Bank of India (SBI), have urged the Reserve Bank of India (RBI) to provide support through the liquidity adjustment facility (LAF) on Saturdays, too.
Bankers said as clearing facilities such as real-time gross settlements (RTGS) and real-time fund transfers were operational on Saturdays, they required funds in case of major outflows. “We have sought a repo window on Saturdays because on these days, the NEFT (national electronic fund transfers) and RTGS go through, but there is no repo,” said Arundhati Bhattacharya, chairman of State Bank of India.
Banks can borrow through the LAF at the repo rate, currently eight per cent. Repo borrowings are capped at 25 per cent of banks’ net demand and time liabilities.
Penal action might be taken against banks defaulting on the CRR requirement.
Earlier, banks were allowed to maintain CRR at 70 per cent on a daily basis. In July 2013, when the rupee-dollar exchange rate turned volatile, RBI raised this requirement to 99 per cent, among other liquidity-tightening measures to curb speculation in the currency market.
After the exchange rate stabilised, these measures were rolled back, but the CRR requirement was retained at 95 per cent. The central bank argued banks could use technology effectively to predict inflows and outflows.
In September last year, the daily requirement was cut to 95 per cent.
In line with the recommendations of a committee headed by RBI Deputy Governor Urjit Patel, set up to review the country’s monetary policy framework, the central bank has been urging banks to reduce their dependence on the daily repo window. It has, instead, favoured term repo auctions.
Banks have also been asked to put in place a model to predict their liquidity needs more accurately.
The shift to a term repos had led to volatility in overnight rates. In July, the call money rate ranged between six per cent and nine per cent, intraday. To address the volatility in overnight rates, RBI started conducting term repo auctions more frequently, in addition to daily variable repo auctions. These steps have, to an extent, helped address intraday volatility.
Bhattacharya agreed RBI’s recent measures had been effective. “If repos are few and far between, there is a problem. We had requested RBI to conduct repos more frequently, which the central bank has now put in place. That has reduced volatility,” she said.
